Analysis: Pay reform at the crossroads

Unpopular as the pay freeze clearly is among feds, it is likely not enough of a revolution to satisfy critics of the General Schedule salary system. The new Congress could vote to impose even more severe cuts in pay. But as long as the system and its administration are unchanged, the criticism no doubt will continue. Federal pay could easily become an issue in the next election campaign.

Two years is an ideal period to plan a replacement system. Reforms could be ready for final authorization and implementation in 2013. Pushing them out two years will give the president and the next Congress the chance to make a final review of the plans.

The alternative is to defer changes until after the 2012 election, a time when federal employees undoubtedly will be hungrier for pay increases. Funds then probably will be even more limited but, as always with the GS system, the increases will have to be "spread like peanut butter," as some observers say. Delaying would make the issue even more incendiary.

In the January Government Executive, the article "Drastic Measures" presents a balanced summary of the conflicting opinions and the hurdles for reform. Perhaps the highest of the hurdles is the needed improvement in performance management practices. Agencies are not starting from scratch, however. The lessons learned from 30 years of experience should enable them to avoid the potholes.

The Hot Button: Pay for Performance

During the past few months, the debate over market-based pay has captured headlines. But once credible survey data are assembled, that issue likely will move to fade into the background. A recent Washington Post survey shows 75 percent of the respondents said federal employees should be paid "about the same" as workers in comparable private industry jobs. That can be readily addressed in planning a new system.

The transition to pay for performance promises to be even more contentious. Opponents of performance pay generally base their argument on a single assertion -- that supervisor discrimination makes it unfair.

The severity of that problem, however, cannot be determined. Some complaints no doubt come from employees who are accustomed to inflated ratings. But discrimination can be very real; biases frequently affect our decisions. If objective measures of performance were available for every job, then concerns would ease. The objective measures that do exist, however, rarely provide an adequate snapshot of an employee's performance.

Discrimination, fortunately, can be minimized. Relying on measurable performance goals is an effective step. So is monitoring and reviewing ratings before they are final.

Toward that end, some managers are studying a new trend in industry that involves using calibration committees composed of peer-level managers to evaluate job performance. Their role is to confirm, at the beginning of every year, that performance plans are reasonable. At year-end, they review proposed ratings. When calibration committee members have doubts, they ask supervisors to defend the ratings. Similar committees have played a role in several successful performance pay demonstration projects.

Calibration committees differ from the failed pay pool committees. They do not negotiate ratings, nor do they negotiate pay increases. The latter are determined by the policy on annual increases.

The argument for performance pay is based on five points:

• A core belief is performance pay contributes to improving organizational performance. Yes, the critics are correct when they argue there is no proof of this. The policy, however, is effectively universal outside government (except for manual jobs). In industry, research on performance pay largely stopped more than two decades ago. Most of the studies that support that claim date to a different era of work management and to human resources practices since discredited. The belief that good performance should be rewarded is deeply entrenched in American culture.
• There is a widely shared belief that the better contributors deserve larger increases. For proponents, it is a fairness issue, consistent with "hard work and success should be rewarded."
• A related management consideration is that funding for salary increases is limited, which makes it an allocation problem. The priority is to satisfy and retain the best performers.
• For the public -- the overwhelming majority of whom work under pay-for-performance policies -- the automatic step increases and claims that federal workers are overpaid contribute to an increasingly unfavorable view of government. The arrival of performance pay in Washington could ameliorate public opinion.
• Performance pay is particularly important to Generation Y workers, who have grown up playing video games with instantaneous feedback and rewards for success. Despite the weak job market, the turnover among these new workers is an acknowledged problem.

Both sides voice agreement that transparency is essential. Employees need to know what is expected of them and in turn what they can expect. The National Security Personnel System pay pool process was said to be a "black box" that left many dissatisfied. That flaw should have been addressed as soon as it surfaced.

One Common System, or Multiple Systems?

The federal government is essentially a conglomerate. Every department and agency has its own mission and workforce management issues. Several departments are themselves conglomerates. One size has never truly fit all.

Allowing departments to develop their own salary systems has not been a successful strategy, however. It clearly violates the philosophy underlying civil service. It also places agencies in competition and could evolve into a dichotomy of haves and have nots. Evidence also indicates that agencies do not have the staff expertise to plan, manage and maintain their own salary systems. And, of course, a Balkanized set of systems would nullify the role of the Office of Personnel Management.

A compromise would be to define a common system framework, presumably based on salary bands, and hold agencies accountable for managing salaries within the framework. They would be responsible for defining their specific needs (e.g., recruiting specialists) and goals, and for managing budgeted funds. The Office of Management and Budget and OPM could define governmentwide policies and oversee system management similar to the approach used with procurement and financial management. That approach mimics the strategy used by corporate conglomerates.

Proven Ideas From the Private Sector

Salary decisions are confidential in the private sector, and that simplifies life for supervisors. Employees might discuss their dissatisfaction with friends, but their knowledge of individual salaries outside their work group is limited. That and other contrasts make the private sector very different from government.

Even in the private milieu, however, policies on awarding raises give supervisors little discretion. Once a rating is decided, policy specifies the increase. Every rating is linked to an increase percentage.

Many companies also link increases to the goal of paying market salaries. Employees paid below market are eligible for larger increases -- based on the assumption they are learning the job. After they reach the market rate, employees see their increases reduced. Only the best performers can expect to reach the maximum of their salary range. Such an approach sends a clear message that performance matters.

Pay for performance is solidly embedded in the business world. Committing financial rewards to planned results institutionalizes a key principle. Where goal setting is used to align employee work efforts with the achievement of strategic goals, it creates a line of sight that helps employees understand how they are contributing to their employer's success. The policies encourage workers to work smarter, not harder.

Manager and Employee Buy-In

There is a striking contrast between the approach used to plan NSPS and that used by the National Geospatial-Intelligence Agency to plan its pay-for-performance system. NGA relied on involving managers and employees throughout the planning and implementation. The success of the NGA system during the past decade makes it a model for planning and maintaining future pay and pay-for-performance systems.

The planning of pay systems is not, as they say, brain surgery. In higher education and the health care field it is common for managers and employees to be involved at each step. With guidance and directed background reading, both groups become fully capable of understanding the issues, evaluating alternatives and planning an effective system. They understand the needs and the problems better than anyone. They have to live with whatever is adopted, so their buy-in is essential.

The common phenomena when employees are involved in planning for change is they take their roles seriously, desire success, take pride in their accomplishments, and act more effectively than management in "selling" planned changes to co-workers.

All that is required to make pay for performance work in the federal government is a willingness to learn from past success in alternative pay systems, an earnest intent to create a rigorous and consistent performance evaluation process, and a willingness to trust in the mechanical translation of those ratings into easily explained pay adjustments.

Howard Risher is an independent compensation and performance management consultant. He was the managing consultant for the studies leading to the 1990 Federal Employees Pay Comparability Act. He is the author or co-author of five books, including Planning Wage and Salary Programs WorldatWork Press, 2009).